Monday, August 25, 2014

Sturm entered the market for Keurig-compatible individual
coffee pods (K-Cups) once patent protection expired, but according to
plaintiffs they jumped the gun. The Seventh Circuit reversed the district
court’s denial of class certification as an abuse of discretion, reasoning that
under its approach consumer class actions could never be certified.(This is a feature not a bug of the basid
defense-side arguments, of course.)

Sturm’s own marketing studies indicated that users consider
coffee brewed in Keurig machines to be high-quality, contributing to the high
price of both the machine and the K-Cups. Until 2012, Keurig held a patent over the
K-Cup filter technology, so Sturm turned to a substitute in 2010 that used the
external K–Cup design “but whose innards were entirely different.”Among other things, it didn’t have a filter.Sturm, selling as Grove Square Coffee (GSC),
intended to gain a first-mover advantage in the post-patent landscape.

But without a filter, Sturm couldn’t use fresh coffee
grounds, so it decided to use instant coffee instead.That’s “essentially, small chunks of
freeze-dried brewed coffee that dissolve and are reconstituted when hot water
is added to them.”Keurig customers didn’t
expect instant coffee, and Sturm’s consultants warned that “use of the word
‘instant’ is a real nono” and should be avoided “if at all possible” in
marketing the product to Keurig owners. The packaging stated in small font that
it contained “naturally roasted soluble and microground Arabica coffee,” but
did not use the better-known name for soluble coffee, instant coffee. The
packaging didn’t say that the contents over 95% instant coffee with only a tiny
bit of microground coffee mixed in.

What result did this packaging have? “Numerous expert
surveys in the record concluded that few consumers understood the true nature
of the GSC product.” One survey showed participants photos of the GSC product
on shelves near other Keurig-related products, then allowed them to look over
images of the box for 30 seconds.Only
14% of participants said the product contained instant coffee. Sturm’s own
expert using another methodology found that only one in 151 test participants
equated the term “soluble and microground” with the term “instant and microground.”
A third expert asked survey participants to score the product on a scale of 1
to 10 on various measures based on its packaging, with “1” being least likely
and “10” being most likely. “When asked whether participants expected GSC to
contain instant coffee, the mean answer was 1.61. Asked whether the GSC product
filtered ground coffee just as other Keurig-compatible coffee products did,
participants essentially said yes, recording an average score of 9.26.” And
that didn’t even get to the percentage
of instant in the blend. Comment: Basically, if this wasn’t deceptive, then
nothing short of a black-is-white untruth—tea in there instead of coffee—would
qualify.

Sturm was not casual in marketing GSC.It heeded its consultants’ warning not to use
“instant,” and conducted focus group testing to see if participants would
notice anything funny.One test reported
that participants didn’t notice differences between Keurig-licensed K-Cups and
GSC in terms of weight or the fact that the GSC cup “emitted a distinct rattle
when shaken.” Even when these differences were pointed out, participants “did
not equate [those differences] with quality.”Sturm sold GSC at “near-premium” prices, about 10% less than Keurig
products.“This had the dual benefit of
reaping a high profit and forestalling consumer suspicions. As one executive
admitted candidly, ‘If you actually got the price too low, people would
perceive it as poor quality.’” Comment: This
is an excellent example of the misleading nature of the price signal in many
circumstances!The GSC cup was 3-4x as expensive as typical
instant coffee, which can just be spooned into hot water.Plaintiffs’ expert concluded that “only a
very ‘price insensitive’ consumer, or one who was misled, would use a $100
brewer [the Keurig machine] to heat water to make instant coffee.”

The public reaction to GSC was “awful.”The day after the product launched in
Wal-Mart, Sturm sent around an email directing that the legal department, not
quality control or sales, be immediately informed about any complaints about
it.More:

One retailer, Discount Coffee,
informed Sturm that “[GSC] has been the poorest performing introductory product
that we have had in our 12 year history.” Several purchasers brought their
complaints to the Better Business Bureau. Although a few comments were
favorable, the vast majority were negative and many “extremely negative,”
according to [defendant] Treehouse’s general counsel…. To mitigate the negative
reviews, Sturm encouraged employees to write fictitious favorable reviews
online; the marketing department even offered to supply the language.

When customers—including one of the named plaintiffs—complained,
Sturm told them that GSC wasn’t instant coffee, but rather “a high quality
coffee bean pulverized into a powder so fine that [it] will dissolve.” This was false except for the “microground”
coffee that constituted less than 5% of GSC. Plus, it falsely implied that coffee is made
by dissolving ground beans in water, but actually coffee is made when hot water
extracts oils and other solids from the ground coffee bean.(Given all this, you can see why, even
setting aside the legal implications of the district court’s rulings, the court
of appeals thought that, if any consumer protection class action could succeed,
it would have to be this one.If not,
fraud in general consumer goods has simply been legalized.)

All this resulted in four separate lawsuits consolidated
into one, seeking classes covering a total of eight states.The district court was concerned that online
purchasers wouldn’t be similarly situated to in-store purchasers; the
plaintiffs offered to exclude online purchasers and the court proceeded on that
assumption (but see below).

The district court erred in two primary ways: first, it
failed to recognize that a common question was whether the GSC packaging was
likely to mislead a reasonable consumer. Second, it applied too strict a test
for predominance.

Commonality: a single common question will do, though a mere
violation of the same provision of law at the defendant’s hands isn’t enough (Wal-Mart).Conduct common to members of the class is
critical.Not every question must be
common: “It is routine in class actions to have a final phase in which
individualized proof must be submitted. … [I]f commonality of damages were also
essential, ‘then class actions about consumer products are impossible.’”Here, the class claims derive from a single
course of conduct by Sturm: GSC’s marketing and packaging. Also, the same legal
standards governed every class member’s claim: the relevant state laws all
require proof that a statement is either literally false or likely to mislead a
reasonable consumer.

The district court, when it found that there were no common
questions, “overlooked the fact that the question whether the GSC packaging was
likely to deceive a reasonable consumer is common. The claims of every class
member will rise or fall on the resolution of that question.” (Citing Amgen
Inc. v. Conn. Ret. Plans & Trust Funds, ––– U.S. ––––, ––––, 133 S.Ct.
1184, 1191, 185 L.Ed.2d 308 (2013), in the continued saga of “securities cases
affecting other class action law despite the big differences between them.”)

Some of the district court’s wrong turns included its
holding that the class lacked commonality because some class members might have
purchased the later package that used “instant.”Yet “many others purchased and allegedly were
deceived by the old package. Tens (perhaps hundreds) of thousands of the
original packaging units already had been distributed by the time the packaging
was altered.”Plus, the record was
unclear about how widely the new packaging was distributed.Minor overbreadth problems justify amending
the class definition, not denying certification.

The district court also concluded, based on no cited
evidence in the record, that the proposed class included a “great number of
members who for some reason could not have been harmed by the defendant’s
allegedly unlawful conduct.” Certification does not require proof that
every class member has been harmed.If
very few were harmed, that’s not an argument for refusing certification; it’s
an argument for certifying the class and then entering a judgment exonerating
Sturm.The cases on which the district
court relied were different: they involved classes defined to include as
members people who could not have been
harmed, not weren’t harmed.For
example, an antitrust plaintiff class can’t include people who bought the
product at issue before the defendant possessed market power, because they
couldn’t have been harmed by the alleged abuse of market power.Online purchasers might properly be excluded if
they couldn’t have been deceived by the packaging—but the court noted that “[o]ften
the online ‘store’ shows an image of the package that the customer can examine
in detail; if that was done here, then the online group may be in essentially
the same position as those who bought in physical stores.”(Indeed, often the online store doesn’t allow
you to read words on the packaging very well; similarity to familiar K-Cups and
their ground coffee might well have loomed even larger in consumers’
understanding of what was inside these pods.)Purchasers exposed to the allegedly deceptive packaging could have been injured by it, “even if
it turns out later that a few were not.”

On the record, “it is apparent that this is not a case where
few, if any, of the putative class members share the named representative’s
grievance against the defendant. If it were, things would be different. A
person whose claim is idiosyncratic or possibly unique is an unsuitable class
representative.”But here, the named
representatives suffered the same injury as members of the proposed class,
given the evidence of the overwhelmingly negative response to the GSC pods,
including complaints and surveys.Whether the packaging was likely to mislead a reasonable consumer is an
objective question, and therefore a common one.

Rule 23(b)(3) also requires predominance and superiority;
the court assessed those issues against the common question it identified
(though there might be more, like Sturm’s scienter).The district court had concluded that
individual issues predominated because each class member’s claim could require individualized
inquiries on causation (or reliance). That was legal error:

Every consumer fraud case involves
individual elements of reliance or causation. As we commented in IKO Roofing, a
rule requiring 100% commonality would eviscerate consumer-fraud class actions.
And because few if any injured parties would bring suit to recover the paltry
individual damages available in most consumer fraud cases, such a rule would undermine
enforcement against “tortious harms of enormous aggregate magnitude but so
widely distributed as not to be remediable in individual suits,” in direct
contradiction of Rule 23(b)(3)’s purpose. The importance of the class action
device in vindicating the rights of consumers is one reason why the Supreme
Court held that “[p]redominance is a test readily met in certain cases alleging
consumer ... fraud,” among others.

For consumer fraud class certification, a court should first
rigorously analyze whether the plaintiffs’ damages can be measured across the
entire class.Here, they can be: “for
example, plaintiff’s damages might be computed by taking the difference between
the actual value of the package she purchased (instant coffee) and the inflated
price she paid (thinking the pods contained real coffee grounds).”

After damages, the court should turn to Rule 23(b)(3), which
deals with class members’ interests in controlling individual litigations.The court should compare the difficulty and
complexity of the class-wide issues to those of the individual issues. “The
class issues often will be the most complex and costly to prove, while the
individual issues and the information needed to prove them will be simpler and
more accessible to individual litigants.” Where technical expertise and costly expert
testimony, as well as extensive discovery, is important to the first stage of
liability (whether a product was defective or a representation misleading),
class treatment can be appropriate, with individual issues “readily determined”
in individualized follow-on proceedings. On remand, the district court could find
superiority “because no rational individual plaintiff would be willing to bear
the costs of this lawsuit.”Given that
reality, a class action has to be pretty bad before it can be inferior to no
litigation at all.If the class prevails
on the common issue, reliance and causation could be straightforwardly assessed
for each purchaser—or more realistically, a settlement would quickly ensue.

After superiority, the court should assess whether the class
allegations are “satisf[ied] through evidentiary proof.” This can include “survey or other evidence
suggesting the relevant common traits of the class members, expert testimony
supporting the classwide allegations, or analysis of the relative costs of
prosecuting the class and individual issues in the case.”The ultimate issue is whether classwide
resolution would substantially advance the case.

Here, the plaintiffs alleged that Sturm deceived consumers
by telling them that the GSC pods contained freshly ground coffee, when at most
5% of the pod did so, and by concealing the fact that the product was
overwhelmingly instant coffee. This was
a lot like the facts of Pom Wonderful.However, the court of appeals wasn’t
directing the district court to certify the class on remand; that decision was
for the district court in the first instance.(But will the district court take the hint?)

Finally, the court of appeals reversed the district court’s grant
of summary judgment against the eight putative class representatives. The
district court found that the GSC packaging wasn’t likely to mislead a
reasonable consumer and that none of the individual plaintiffs put forth
evidence that he or she was deceived. The district court’s analysis of
misleadingness was wanting.It said only:
“The Court has seen the packaging at issue—Plaintiffs bring it to each
hearing—and finds that it is not designed to mislead consumers. It says what it
is.” That bare conclusion apparently
assumed that only literal falsity can be misleading, which is not so (and, RT
here, apparently assumed that intent is required to violate consumer protection
law, also not so).“Moreover—ironically—it
appears the district court itself was confused about the product: the court’s
analysis reveals that it failed to understand that ‘soluble’ coffee and ‘microground’
coffee are not the same thing.”

There were genuine issues of material fact for each of the
individual plaintiffs on whether the packaging was likely to mislead a reasonable
consumer, given Sturm's conscious avoidance of the word “instant” and package design resembling Keurig products; testimony from several plaintiffs that they were misled; many statements on the package implying that the product was premium fresh (unbrewed) coffee; failure to disclose that the product was little more than
instant coffee; and at least three independent expert surveys, all employing
different methodologies, that found consumer confusion. The district court also didn’t take each individual
plaintiff’s claims seriously enough:

For example, the court emphasized
that Suchanek admitted that she understood the word “soluble” to mean that
something is capable of dissolving. But the fact that Suchanek correctly
understood the definition of that English word is not enough to throw out her
entire consumer-fraud claim. Did she know that soluble coffee is instant
coffee? Did she understand that the GSC product was over 95% instant? Suchanek
says not. As she stated, “Keurig brews coffee.... If I was going to buy a k-cup
of instant coffee, I would have used my hot water tap that has boiling water at
the sink instead of buying an expensive Keurig machine.” Taking all disputed
facts in the light most favorable to Suchanek, a reasonable juror could
conclude that Suchanek was deceived.

Other plaintiffs who shouldn’t have been tossed out included
a plaintiff who admitted that she hadn’t read the text on the packages, but
testified that she was misled because of the attractiveness of the package and
the picture of a K-Cup on the box.

RT: It says a lot that a district court could toss out a case with this much evidence of deceptive conduct. I don't think this signals an especially expansive view of class actions from the 7th Circuit; rather, as the court says, if this isn't actionable then there is no such thing as a consumer class action.

Creative Commons/disclaimer

Text on this blog is licensed under a Creative Commons Attribution 2.5 License. Pictures and works quoted may be subject to other parties' copyrights.
I speak for myself. On this blog, I do not and cannot speak for Georgetown Law, the Organization for Transformative Works and/or AO3.